Google Earnings Preview: Q408

Google [[GOOG]] is scheduled to report fourth quarter 2008 results after the market closes on Thursday, January 22. Based on our analysis, we at are expecting GOOG to report better than expected results that beat Wall Street’s expectations.


Analyst Expectations

We are forecasting revenues of $4.16 billion and EPS of $5.06. This would represent a 20% increase in revenues from last year’s $3.39 billion in the same period. The current analyst consensus calls for revenues of $4.12 billion and $4.96 EPS.


Google should benefit from increased ad spending in the fourth quarter by retailers desperate to move inventory over the holiday season. Despite the bad economic climate, Google appears to continue to capitalize on the migration of ad dollars from offline to more measurable online vehicles. Even within the online advertising segment, Google pay-for-performance model continues to shine. Advertisers wanting to make sure they are getting the biggest bang for their buck are shifting more of their dollars into search engine marketing.


In addition to being able to maintain double-digit growth in a recessionary environment, Google appears to have acquired a newfound desire to control expenses. Unnecessary expenses are being eliminated, a global hiring freeze has been implemented, cap ex spending is being reigned in, and just last week Google even took the unthinkable step of laying off full-time employees.


These cost cutting measures as well as a renewed effort to capitalize on untapped revenue opportunities are clearly the right moves to be making. With over $14 billion in cash on its balance sheet, the company is well equipped to ride out this recession and could be one of the big winners of 2010.


That being said, it is likely that 2009 estimates will still need to be revised downwards as most analysts haven’t fully taken into account the recessionary environment that Google is now operating in. The accelerating dollar will also pressure top-line growth.


Share Performance

Google’s shares are down almost 3% this year. In 2008, their shares declined over 55% poorly underperforming even the Nasdaq’s 41% decline.



Shares are now trading at 14x consensus 2009 EPS estimates. This is below the relative valuations of their peer group. Despite our expectations for a 4th quarter beat, we expect that 2009 estimates will be revised downward. Given the current economic climate we would expect GOOG’s shares to remain range bound for the next few months.


Recommendation: Hold with a $300 price target.


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